No general tax hike in budget agreement

Legislators are closer to spending plan deal

Here's a look at some of what legislative leaders are proposing to plug a $15.2 billion budget shortfall:

- Cut $7.1 billion in state spending, including reductions in public transit and human services programs; includes lower-than-projected education funding, although schools will be fully funded under Proposition 98's minimum funding guarantee.

- Collect $2.3 billion through "accelerations" in revenue by requiring corporations and upper-income taxpayers to pay 30 percent of their estimated taxes in each of the first two quarters of the fiscal year instead of 25 percent.

- Collect $1.6 billion through a 10 percent increase in state income tax withholdings.

- Close the "yacht tax" loophole that allows people to avoid paying state sales tax on boats, RVs, airplanes and other luxury goods if they take possession out of state and keep the items there for more than 90 days.

- Borrow against future lottery revenue to secure $10 billion over the next two fiscal years, starting in July 2009. The money would be deposited into a new fund dedicated to retiring debt. Prize payouts would be increased, but no new games or technologies are envisioned.

- Increase the state's "rainy day" fund from 5 percent to 10 percent of the general fund budget.

- Grant the governor authority to cut up to 7 percent from state operations when revenues fall below expectations. The governor would not have the ability to cut from the largest areas of the budget — education and health and human services.

Source: Assembly Budget Committee

SACRAMENTO — Patching together billions of dollars worth of accounting maneuvers, accelerated tax collections and other changes to tax laws, California lawmakers Monday night appeared on the verge of ending the longest state budget impasse in history without resorting to a general tax increase or heavily borrowing from special state funds.

Leaders of both parties negotiated the deal on Sunday, then spent Monday briefing their members on the details and preparing for what was expected to be a very long night. In addition to the budget itself, the deal was dependent on passage of 25 separate pieces of legislation.

Before they could begin deliberations, however, Gov. Arnold Schwarzenegger presented the four leaders with a list of three demands, threatening to veto the deal if they were not accommodated.

Schwarzenegger's demands concerned the details of how much money would be directed into a strengthened "rainy day" fund and under what conditions money could be withdrawn from it in the future.

Legislative leaders were privately discussing how to respond to those demands late Monday. The Senate voted 29-10 to approve the main budget bill, two more than the two-thirds majority needed for passage, but that vote was awaiting a final recording as of 11:45.

The proposed budget deal would close the state's $15 billion budget shortfall through about $7 billion in spending reductions and $9 billion in added revenues. The revenues would be generated by such steps as increasing the amount of income tax withholding from the paychecks of all California workers and requiring those who make quarterly estimated tax payments to frontload their payments next year.

In each case, taxpayers would have the same total tax liability, but the state would receive more money in 2009 and less in 2010.

The deal would result in a $1.5 billion shortfall heading into next year's budget — a relatively small amount that would be made possible by selling increased future lottery revenues to investors next year. That sale would generate an estimated $5 billion in each of the next two years.

Changes in the lottery and in the "rainy day" fund requirements would have to go before voters, most likely in a special election next year.

Some criticized the budget deal for its reliance on financial gimmicks and failure to address long-term fiscal problems, but both sides achieved their principal objectives for the near term: Minority Republicans successfully blocked a tax increase, and majority Democrats prevented spending on education, healthcare and social service programs from dipping below the minimum levels they had decided upon in June.

Still, lawmakers acknowledged that the budget deal fell far short of what they wanted.

Sen. Sheila Kuehl, D-Santa Monica, said the action represented a necessary cave-in by Democrats after more than two months of attempting to persuade at least a handful of Republican lawmakers to vote for a tax increase.

"It's a cave-in because we really thought it irresponsible to have another budget without revenue enhancements," she said. "It's another year of smoke and mirrors, another year of pushing the problem into next year."

Under the agreement, schools would get $58.1 billion, which is $300 million more than Schwarzenegger proposed in his August compromise proposal but $800 million less than Democrats had agreed to in the plan adopted by the budget conference committee over the summer.

Compared with the spending levels schools would have needed to keep pace with their 2007-08 budget, it is a $3 billion reduction in education funding.

The agreement also avoids some of the deep cuts to Medi-Cal that had been contemplated by Schwarzenegger. Among other things, it restores a 10 percent cutback in provider rates, beginning in March.

The deal also includes some of the "budget reforms" that Schwarzenegger has been insisting upon all year. It increases the amount of money that will annually be placed into a reserve fund called the Budget Stabilization Account, allows that account to accumulate a higher balance and requires a specific act of the Legislature to withdraw money from the fund.

In addition, the deal would give the governor limited authority to make midyear budget cuts. He or she could reduce general government spending by up to 7 percent and suspend any approved cost-of-living increases for four months, without approval from lawmakers.

Even without a tax increase, the effects of the budget deal could be felt by taxpayers beginning Jan. 1. At that time a new law would kick in increasing the amount of payroll tax withholding by 10 percent. In other words, a worker who now has $100 per pay period withheld from his or her paycheck would have $110 withheld instead.

For taxpayers who typically owe the Franchise Tax Board on April 15, it will mean they will owe less at tax time. For those who typically receive a refund, it will mean a larger refund check. In each case, their take-home pay will be reduced from paycheck to paycheck.

Taxpayers who wish to do so can adjust the number of deductions on their payroll withholding form to prevent a reduction in take-home pay.

Other revenue adjustments would require those who file quarterly estimated tax payments to pay 30 percent of their expected 2009 tax liability in each of the first two quarters of next year and 20 percent in each of the last two quarters, rather than paying a flat 25 percent each quarter.

Those two changes alone will result in $2.9 billion in additional revenue in the 2008-09 fiscal year.